One of the keys to being a successful real estate investor is finding deals! So, what makes a property a “deal?” That depends on what your end goal is …
Do you want to create passive income through rental properties (“buy and hold” real estate)?
Do you want to flip houses (buy, renovate/upgrade, and then resell)?
Do you want to be an expert at finding deals and then earn a fee by assigning the contracts to other investors (“wholesaling”)?
Do you want to own commercial properties and rent them out to businesses?
What about having short-term rentals, like an AirBnB?
So. Many. Options! It can be overwhelming.
This is where many new investors can hesitate to take a step forward, what is known as “analysis paralysis.” All of these methods are potential money makers, but not all of these may be great options for every TYPE of investor. It really depends on your comfort level with risk, what you want your day-to-day to look like, and your long-term goals. For now, consider what areas of real estate investing you want to focus on and become an expert on those areas. Narrowing your focus is really important, especially when you are just getting started.
For us, we want to ultimately create passive income by having a large rental portfolio. In order to generate the income needed to create that portfolio, we are also looking to flip houses and wholesale along the way. We will get into how the numbers play out for these different types of investing in another post, but the name of the game regardless of the end goal (or “exit strategy”) is to find deeply discounted properties from motivated sellers.
No matter what type of real estate investing you want to pursue, they ALL start with finding deals.
So, how do you find deals?
You might be thinking, can’t you just look at Zillow to see what is for sale in the area? Or check with a realtor? Yes, absolutely. However, properties that are for sale on the Multiple Listing Service (MLS) have been placed by realtors. That means, the seller is looking for top dollar for the property and the higher price will include a commission for the agent. These listings are usually not going to work for an investment property, where the goal is to purchase the property at lowest price possible. So, our goal is to find homeowners that want to sell their property before they list it on the retail market with an agent. These are known as “off-market” properties. So, how do you find these properties before they are listed on the MLS?
Since crystal balls can be unreliable, you can take the more proactive step of contacting the homeowner directly to see if they are interested in selling their property. For sale by owner (FSBO) signs and listings on Craigslist and similar sites are also a good way to find homeowners looking to sell their property. But, there is another way to generate a unique list of potentially motivated sellers that no one else has.
Driving for dollars: the best way to find off-market deals.
There are lots of ways to find deals, which we will cover in later posts, but this post is going to be limited to our favorite: driving for dollars. It’s an easy and inexpensive way to get started. When discussing our first deal, I explained that Mike found the house using this method. It’s pretty simple: you drive around neighborhoods of interest and look for houses that appear to be “distressed.” These are houses that have a lot of deferred maintenance, are in obvious disrepair, and/or appear to be vacant. Some signs to look out for are overgrown yards, an exterior that has seen better days, or houses that have papers posted on the doors/windows. These are usually notices by the city or mortgage holder and are good indicators that the houses are sitting vacant. Vacant houses will also usually not have garbage bins or any decorative elements outside.
Neglected, vacant houses are GOLD.
Houses cost money to maintain, whether someone is living there or not. The taxman expects his share, the bank demands its mortgage payment, and utility companies need to be paid for their services. In addition, normal maintenance is required to prevent that investment from becoming a liability. If leaky roofs aren’t fixed, gutters maintained, and termites left to do their bidding, the damage can cost thousands and thousands of dollars. If a homeowner inherits or otherwise takes on a secondary property, that could be a great investment if it is generating rental income and paying off the remaining mortgage (if there is one). However, if that secondary property is sitting vacant, it moves into the liability category.
Do some research before heading out.
If you are very familiar with your market area, chances are you are already thinking about neighborhoods that you want to visit. If you are unsure, a good way to do a quick analysis is to use Zillow‘s map feature. By zooming in on areas of interest, you can see a map with the Zestimates, Zillow’s estimated property values.
This will give you an indication of what homes in the area are selling for to make sure that you are looking in an area within your budget. Just know, that Zillow’s Zestimates are regularly inaccurate and can’t solely be depended on when analyzing if a property is a deal or not, but they are helpful for our purpose here. Also, it’s important to remember that you want to find properties that are older and might be in need of repair or upgrades to flip and make a profit. By clicking on a few properties on the map, you can see the year built, which will give you an idea about the age of the homes in the neighborhood.
Our Favorite Tools of the Trade
Driving around and looking for these properties is a bit of a treasure hunt. And the best part is, is that it is very inexpensive to start. We will discuss budgeting in a later post, but it is important to have an idea of how much money you can allot for lead generation purposes. With driving for dollars, all you really need is a pad of paper and gas money. When you find a house, you note the address and any additional information you want about the property. Coming up with a system to track these leads is important. I recommend, at minimum, loading this data into a spreadsheet. We use an app called DealMachine that saves properties we select along with the property details and homeowner information. It also gives you the option of downloading all of this into a prepared spreadsheet. It saves a lot of time and keeps us organized for a monthly fee of $50. If you have some money for tools such as this, it is at the top of our list for “must haves.” For us, it is totally worth it. It also allows you to take a picture of the property and add it to a postcard to mail your interest in buying the property to the property owner, which is a really great feature. Here are a couple of screenshots of the app:
The circled areas are what I look at first while we are driving around. It gives me a better idea of the potential selling motivation of the owner. For example, if it is a distressed property that says “owner occupied,” that means that this is the primary residence for the owner and they are currently living there. Being that it is in need of work, the owner might have life circumstances that prevent them from maintaining the home and might be motivated to sell it. If it says “absentee owner,” that means it is likely a rental property, which is being used as an investment. Since, again, we are looking for distressed properties, an investment that is not being maintained might have a “tired landlord” that would be open to selling.
“Sale date” is what I use most while we are out driving to assess if this is a potential deal or not. Since our goal is to find properties with equity that the owner might be thinking about selling, the sale date is important. If it is a property that has been owned for many years, such as the one above, that is a much better lead than one that has been purchased in the past few years. Also, other investors may have just purchased the property and have not yet begun work on remodeling, so those are not leads for us.
Also shown in the above, is “county link.” Looking up the property on the county’s property appraiser’s website can also offer a lot of additional information.
If we decide that a property is a potential lead for us, then we will take a picture of it through the app and then follow-up with the homeowner with a personalized postcard expressing our interest to buy. This can be done right through the app! You also have the option of using the pre-loaded Google street view as the image, but we like having a more up-to-date picture. After all, some absentee owners might not have visited the property for years and might not realize the state of maintenance.
Note: It is much easier to use DealMachine’s website to manage leads, especially the postcard templates, after entering them in the app.
One downside of DealMachine.
The one major complaint we have about DealMachine is that while it has a route tracking feature, it doesn’t let you access this mapping data unless you pay an additional $20/mo. I picked up a work around, though, from someone on a forum and they suggested running the free MapMyRun app in the background to track where you have driven. What a fantastic idea! So, we have been doing this and it’s worked great. Here is the one we did recently:
Isn’t this great?! And I can title the “run” whatever I want. I titled this one “Escambia High” because we drove around the surrounding neighborhoods and, since I am terrible with directions, I like to put familiar landmarks. We use these saved maps a lot before we plan our next outing to make sure that we aren’t retracing our steps. It’s also going to be really handy come tax time for mileage. Wins all around!
Side note: please make sure you are not driving distracted while using these apps. It is much easier to have a second person in the vehicle that is responsible for using the apps so that the driver can focus on safety.
Driving around neighborhoods can be fun!
If you are lucky, you will find some unexpected treasures on your hunt for houses:
And my ALL TIME favorite …
And with that, I’ll see myself out. 🙂 Happy house hunting!